Digests

Income Tax

Reassessment

Appeal from Tax Court of Canada decision (2008 TCC 324) upholding appellant’s reassessment—Between 1990–1993, appellant purchasing ranitidine, active pharmaceutical ingredient used in drug marketed in Canada under brand name Zantac—Appellant’s ranitidine purchased from Adechsa, related non-resident company, for amount between $1 513–$1 651 per kg—During same period, two generic pharmaceutical companies purchasing ranitidine from arm’s length suppliers for amount between $194–$304 per kg—Minister of National Revenue reassessing appellant, increasing its income by difference between price paid by generics, appellant pursuant to Income Tax Act, R.S.C., 1985 (5th Supp.), c. 1 (ITA), s. 69(2)—ITA, s. 69(2) providing that where taxpayer has paid to non-resident person with whom taxpayer not dealing at arms’s length amount greater than amount that would have been reasonable had parties been dealing at arm’s length, reasonable amount deemed to have been amount paid, payable therefor—Whether Tax Court Judge erring in determining circumstances relevant to assessing “reasonable amount” referred to in ITA, s. 69(2)—Two specific contractual agreements at heart of present appeal: (1) licence agreement between appellant, parent company, (2) supply agreement with Adechsa—In order to make determination in s. 69(2), Judge having to consider all relevant circumstances which arm’s length purchaser would have to consider—Appellant taking issue with Judge’s findings which disregard licence agreement, as arm’s length appellant could not have sold Zantac branded products without licence agreement—According to appellant, licence agreement requiring purchase of ranitidine from Adechsa, therefore by not considering it, Judge ignoring crucial business circumstance—Judge erring in concluding licence agreement irrelevant consideration—Instead, Judge determining fair market value of ranitidine, finding anything paid over such amount was in excess of “the reasonable amount”—Judge failing to consider business reality which arm’s length purchaser was bound to consider if he intended to sell Zantac—ITA, s. 69(2) not operating regardless of real business world in which parties to transaction participate—Appeal allowed.

GlaxoSmithKline Inc. v. Canada (A-345-08, 2010 FCA 201, Nadon J.A., judgment dated July 26, 2010, 31 pp.)